On July 25th, Cailian Press reported (Reporter Wang Hong) that the central bank conducted the second MLF operation this month, with an operation amount of 200 billion yuan and a clear use of an interest rate bidding method. The winning bid rate for this time is 2.3%, a decrease of 0.2 percentage points from the previous time. Industry insiders said that this increased MLF operation meets the mid and long-term fund needs of financial institutions. In addition, the MLF operation uses an interest rate bidding method, which can better reflect the supply and demand situation of funds. This moderate downward adjustment of MLF interest rates helps to bridge the gap between market interest rates such as interbank certificates of deposit.

Experts believe that the arrangement of this MLF operation after LPR quotation reflects the intention to dilute the color of MLF interest rate policy. It is worth noting that during the transitional period of the MLF operation time adjustment, financial institutions need to pay more attention to the mid-month liquidity situation. Overall, the recent People's Bank of China has reserved multiple measures to optimize the open market operation mechanism. Experts predict that the central bank will continue to use a comprehensive policy to guide market interest rates to operate steadily around the central bank's policy interest rates.

To meet the mid and long-term fund needs of institutions.

Industry insiders believe that this increased MLF operation meets the mid-to-long-term fund needs of financial institutions. The additional MLF operation is close to the end of the month, and the liquidity demand of financial institutions has increased significantly. The money market interest rate has some upward pressure. On July 24th, the overnight and 7-day repo rates in the interbank market were around 1.75%, which were 9 and 4 basis points higher than the day the central bank cut interest rates on July 22nd.

Wind data shows that 401 billion yuan of MLF will expire on August 15th. Some trading personnel of MLF participating institutions also stated that they considered the amount due next month and even considered the possibility of the central bank's sale of national debt in this demand submission. The net investment of 200 billion yuan in this MLF operation has well met the liquidity needs of financial institutions.

Experts believe that the MLF clearly uses an interest rate bidding method and the winning bid rate will better reflect the market interest rate situation. The winning bid rate for this MLF operation is 2.3%, a decrease of 20bp from the previous time. This echoes the 10bp rate cut of the 7-day reverse repurchase rate on July 22nd, both of which are the first adjustments since August 2023.

It is worth noting that the trading announcement mentioned that MLF operations use an interest rate bidding method, which means that participating institutions can choose multiple interest rates when bidding, and the final winning bid result can better reflect the supply and demand situation of funds. In terms of actual effects, this moderate downward adjustment of MLF interest rates helps to bridge the gap with market interest rates such as interbank certificates of deposit.

"On July 22, the 7-day reverse repurchase of the open market, the standing lending facility (SLF) interest rate were lowered by 10 basis points. The decline in MLF interest rates this time will keep various policy tool rates at an appropriate interest spread, and also help to bridge the gap with market interest rates such as interbank certificates of deposit," said Dong Ximiao, chief researcher at Zhonglian Research.

Reflecting the intention to dilute the color of MLF interest rate policy.

Some experts analyzed that the central bank's increased MLF operation on the 25th is both unexpected and reasonable. The arrangement of this MLF operation after the LPR quotation reflects the intention to dilute the color of the MLF interest rate policy.

Previously, Pan Gongsheng, the governor of the central bank, stated at the Lujiazui Forum that he wanted to dilute the policy interest rate of tools other than 7-day reverse repurchase operations.

"This month, when the MLF interest rate did not change on the 15th, the loan market quoted interest rates (LPR) followed the 7-day reverse repurchase rate to fall, indicating that LPR turned to refer to short-term policy rates. And this MLF operation is arranged after the LPR quotation, which further dilutes the policy interest rate color of MLF, indicating that changes in winning bid rates do not have policy signal implications," the above experts pointed out.

During the transitional period when the timing of the MLF operation is adjusted, financial institutions need to pay more attention to the mid-month liquidity situation. Industry experts also said that if the MLF is postponed to operate on the 25th of each month in the future, financial institutions will face new challenges in liquidity management due to the remaining MLF due before and after the mid-month of each month, and other influencing factors such as tax periods.

It is worth noting that the People's Bank of China has reserved multiple measures to optimize the open market operation mechanism in recent period, including using a fixed interest rate and quantity bidding method for the 7-day reverse repurchase to better meet institutional demand, increasing temporary reverse and repurchase operations to deal with emergencies in the market, brewing national debt trading operations, etc. Experts predict that the central bank will continue to use the above-mentioned tools in a comprehensive manner to continue to maintain adequate liquidity and guide market interest rates to operate steadily around the central bank's policy interest rates.